Tuesday, November 18, 2008

The Student Loan Squeeze

The government announced plans Friday to expand purchases of the student loans it backs in an effort to head off a potential shortfall next year.

While student loans are typically considered among the most secure assets — especially ones that carry government guarantees — the fear that has spiked financing costs for mortgage and auto loans has spread into student loans as well.

While students are still able to obtain federally backed loans, the credit crisis has hurt the lenders that provide them. Dozens have stopped offering the loans, blaming market conditions.

The initiative by the Education Department is intended to make it easier for these loan companies to obtain financing. In the 2009-10 academic year, the agency will purchase loans, as it has this year. The agency will also pledge to be the buyer of last resort for loans purchased by a private intermediary in an effort to foster investment in the student loan industry.

Tens of billions of dollars in loans may be eligible for the programs, according to the department. “We were able to provide stable, reliable funding for students this school year,” Margaret Spellings, the education secretary, said in a telephone interview. But the government is acting now to try to head off problems that could affect plans for next year, she said.

“Institutions, lenders and kids and families are thinking about financial aid issues for the next school year,” Ms. Spellings said.

Congress has authorized the Education Department to buy back loans made from 2003 to 2010, although the agency has not made full use of the authority. The government hopes that by serving as a buyer of last resort for student loans, it will attract investors who have shunned the loans. A private company, assured of a fallback buyer, could buy the loans and borrow from private investors to keep operating.

Student loans, like credit cards and mortgages, have long been financed by selling bonds to private investors. But in recent months, investors have shown little interest in purchasing either lenders’ bonds or their federal student loans, despite their government guarantee.

Student lenders have carried loans made years ago on their books, unable to sell them. When some student lenders saw their financing costs spike on older government-guaranteed loans they were waiting to package and sell that put more stress on the troubled industry. The government hopes that providing a new source of financing for those loans will ease some of the pressure.

“They have these government-guaranteed loans and nobody wants to fund them,” said Sameer Gokhale, an analyst at Keefe, Bruyette & Woods in New York. “The government is agreeing to buy more of the loans to give more liquidity.”

“It goes to show how irrational the securitization markets still are,” he added. “We aren’t talking about an asset class that has anything to do with subprime.”

The lenders’ inability to sell loans hinders their ability to make new loans.

“If the lenders sold them, they could take the proceeds and presumably have the capital to lend out,” Tim Ranzetta, founder of Student Lending Analytics, an independent research firm. He said that some large lenders were carrying billions of dollars in loans made before 2008 on their balance sheet.

Sallie Mae and big banks like Citigroup and JPMorgan Chase, which make thousands of government-subsidized student loans each year, stand to benefit the most from the government’s program. But so will dozens of nonprofit student lenders that are caught in the same bind. The government’s action will not resolve all worries about student lending. Student loan borrowers this year are finding it more difficult to obtain private loans, which are not guaranteed by the government and which typically carry higher interest rates and less favorable repayment terms.

Financers like Sallie Mae, the student lender, have raised the credit standards that borrowers must meet. Others have stopped making private loans entirely. According to Finaid.org, a financial aid Web site, 37 lenders have stopped making private loans and 107 have stopped offering federally guaranteed loans.

So far, the government’s student loan financing program has supported more than 40 percent of all federal loans disbursed this year, meaning that the government has bought, directly or indirectly, about $9 billion in loans, according to the Education Department.

Edward M. Kennedy, the Massachusetts Democrat who is chairman of the Senate Education Committee, praised the Education Department’s move. “We need to do everything we can to prevent students from becoming the next victims of the financial crisis,” he said in a statement, adding, “Next year, we need to take a closer look at these programs to insulate them from fluctuations in the market so students’ ability to access loans is not threatened.”

One of my old college roommates and I were reminiscing the other day, and we realized that during the time we were in college, tuition nearly doubled. Costs keep spiraling; college presidents keep raking in the dough; more and more instructors are part-time faculty; and classes are getting ever larger.

If education is truly valued, students will find a way. But pricing college out of the middle class by shutting off loans is short-sighted in the extreme.

What's On the Bookshelf? (And stacked on the floor, and in the loo, and next to my bed, and in my backpack....)

Infinite Jest, by David Foster Wallace

The Stripping of the Altars, by Eamonn Duffy

Harry Potter and the Deathly Hallows, by J.K. Rowling

Wishful Drinking, by Carrie Fisher

The Big Over Easy, by Jasper Fforde

Columbine, by Dave Cullen

The Forever War, by Dexter Filkins

Here, Bullet, by Brian Turner

Random Thoughts

"Read-ity read read read."-- The Ramblin' Educat

"Personally, I think for democracy to exist, opposition is key. History seems to bear that out. One sign you're doing a good job is when the only argument the extablishment can muster is "shut up" and variations on that theme.-- NYC Educator

"The only thing worse than having no taste is having no shame."-- via Mamacita

"The real reason that we can't have the Ten Commandments in a Courthouse is because you cannot post "Thou Shalt Not Steal, Thou Shalt Not Commit Adultery & Thou Shall Not Lie" in a building full of lawyers, judges and politicians. It creates a hostile work environment."-- Molly Ivins (via Mike in Texas!)

"Fat, drunk, and stupid is no way to go through life, son."-- Dean Wormer, Animal House

"I've seen a look in dogs' eyes, a quickly vanishing look of amazed contempt, and I am convinced that basically dogs think humans are nuts."-- John Steinbeck